Amphenol Corporation (APH): A Major AI Stock You Should Be Watching

We recently made a list The 33 Most Important AI Companies You Should Be Paying Attention To. In this article, we’ll take a look at how Amphenol Corporation (NYSE:APH) stacks up against other notable AI stocks.

AI has fueled much-needed market growth in the tech industry over the past year. The benchmark S&P 500, dominated by tech giants, is up nearly 20% over the past year. The tech-heavy NASDAQ Composite is up more than 21%. In light of easing inflation and falling interest rates, market analysts had been predicting a surge in growth stocks through 2024. But the buzz around AI has helped turn that mundane interest into an extraordinary wave of optimism across the economy. While tech stocks have been the biggest beneficiary, there’s no doubt that AI will soon permeate other sectors of the economy, from manufacturing and supply chain to transportation, entertainment and retail.

There are numbers that illustrate this argument in quantitative terms. Across the economic spectrum, AI investment is growing at a rapid pace. For example, according to a recent report on the AI ​​industry by prominent investment bank Goldman Sachs, established companies worldwide are expected to spend almost $1 trillion on developing AI infrastructure in the coming years. Investment in AI startups is also growing rapidly. So far in 2024, venture capital firms have closed about 200 deals with AI companies, investing almost $22 billion. The average funding round size for AI startups is over $100 million at an average valuation of over $1 billion. By comparison, the numbers for non-AI startups are $20 million and $200 million.

Key players who caught the AI ​​trend early have outpaced their competitors. Shares of companies that make graphics processing units (GPUs), specialized AI chips, and generative AI products have surged. Overall, the median return for AI-related companies on the S&P 500 is 20%, compared with 2% for non-AI stocks. On the NASDAQ Composite, AI companies account for 90% of the overall returns on the frontier index. Analysts expect these gains to translate into earnings and GDP growth. Joseph Briggs, senior global economist at Goldman Sachs, says that over the next decade, AI will likely automate 25% of all work tasks and increase U.S. productivity by 9% and GDP growth by more than 6%.

Research presented in the opening keynote at EMW 2024 by Philippe Laffont of Coatue Management suggests that these gains could be the start of a new supercycle for the tech industry, following previous cycles such as personal computers in the 1980s, networks in the 1990s, wired internet in the 2000s and mobile internet in the 2010s, which led to the popularity of the cloud. But investors have more reason to be optimistic about this growth, because it compares favorably with cycles of the past. Software and internet experts Kash Rangan and Eric Sheridan say that tech companies appear to be investing in AI products, tying expenses to revenues, providing a safety net that was absent in previous cycles.

Since the AI ​​wave began in early 2023 with the launch of ChatGPT by Californian company Open AI, the industry’s focus has shifted from software to AI hardware and infrastructure. AI infrastructure companies have added nearly $6 trillion to their market capitalization since the first quarter of 2023. Before a killer AI app emerges or large-scale AI automation begins—Daron Acemoglu, a Turkish-American economist at MIT, predicts it will take more than a decade—new areas of AI infrastructure are emerging. These include media, energy, internet, and manufacturing (see 20 Industrial Stocks Already Riding the AI ​​Wave). Profits of prominent utilities, industrials, energy, and internet companies that are key to AI development are matching those of traditional AI stocks.

Investments in energy and utilities are important if AI’s potential is to be realized. Goldman analysts Carly Davenport and Alberto Gandolf expect the proliferation of AI technologies and the accompanying need to maintain data centers to drive demand for utilities like no other in a generation. The question remains whether AI’s pace will keep pace with energy investment. That’s because utilities are heavily regulated and have supply chain constraints that can’t be easily overcome. If the investment is made at the required level, it could still take several years for the full benefits to reach AI companies.

All the hype surrounding AI has investors on edge, with the ghosts of past bubbles haunting their memories. While comparisons to the past are the surest way to find a foothold in uncharted territory, the data shows that it may not be the wisest strategy given current market dynamics. For example, at the height of the dot-com bubble just before the turn of the millennium, some software companies were trading at 132x their earnings. The five-year average for that value in 1999 was just 37x. By 2023, even the biggest AI stocks were trading at P/E multiples of around 39x. The five-year average for that last year was 40x, which shows why AI valuations may not be over the top.

Indeed, AI companies can target valuations in the trillions of dollars, according to some of the largest software and internet companies in the market. That’s the revolutionary power of AI technology. Over the past decade, tech giants have achieved scale that few companies have achieved before them. Combining billions of users, hundreds of billions in revenue, and tens of billions in net income, this handful of companies command 80% of the Fortune 500’s valuation. They are category leaders in areas like smartphones, e-commerce, cloud, and software as a service (SaaS)—all areas AI promises to revolutionize—and they outspend their competitors on research and development. That’s why many of these companies are aggressively incorporating AI into their business models, hoping to retain their throne.

Some investors still fear that AI companies will overwhelm software companies in the market in the short and long term. A cursory look at the price-to-sales (PS) ratios of software stocks over the past decade reveals that after peaking in 2021, valuations for SaaS companies are approaching all-time lows. Some of this pessimism around software can also be attributed to slower earnings growth. Coatue’s research shows that only 1% of SaaS stocks expect 30% earnings growth over the next twelve months, down from 30% at the height of the SaaS craze. As the future of human-machine interaction shifts toward natural language communication, software companies that adapt to AI changes are more likely to survive than those that don’t.

As markets decouple from rising interest rates, inflation rates decline, and prospects for a soft landing become brighter, the macroeconomic outlook for AI also looks favorable. AI remains the primary driver of future growth in terms of earnings for the S&P 500. According to Coatue’s research, AI-related stocks will grow at a compound annual rate of almost 20% over the next three years, outperforming their non-AI peers by almost 14 percentage points. 40% of tech earnings will be accelerated by AI tailwinds during that period. All indicators point to a brighter future for AI investors over the long term.

Our methodology

In this article, we’ve selected AI infrastructure stocks that have gained more than 25% in 2024 and are also popular with hedge funds. These are the best AI stocks to buy, according to market participants and hedge funds. Why are we interested in stocks that hedge funds are investing in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of top hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (more details here ).

Amphenol Corporation (NYSE:APH)

Number of hedge fund holders: 51

YTD return as of August 1: 32%

Amphenol Corporation (NYSE:APH) specializes in the design, manufacturing, and sale of electrical, electronic, and fiber optic connectors. The company offers a wide range of products for AI companies, including chipsets, networking solutions, and server and GPU components. It also supplies high-speed power connectors for data centers that support AI computations for large software companies. Driven by growing demand for AI-related products, Amphenol achieved more than 56% organic growth in datacom sales in the second quarter. To meet the growing number and quality of orders from AI-enabled customers, the company plans to increase capital investments in the coming months.

Amphenol Corporation (NYSE:APH) CEO Adam Norwitt said during its second-quarter earnings conference call that the company saw particularly strong orders from AI-focused data communications customers during the March-through-June period, even though traditional data communications orders also saw nominal growth.

Total APH takes 25th place on our list of top AI stocks to buy. While we recognize APH’s potential as an investment, our belief is based on the belief that some AI stocks offer a better chance of achieving higher returns, and in a shorter time frame. If you’re looking for AI stocks that are more promising than APH but are trading at less than 5 times earnings, check out our report on cheapest AI action.

READ MORE: Michael Burry Sells These Stocks and Jim Cramer Recommends These Stocks.

Disclosure: None. This article was originally published on Insider Monkey.